Huge declines in traditional outsourcing as Covid-19 puts a stop on deals

The global IT outsourcing and business process outsourcing sector reduced in value by 5% after traditional outsourcing contracts signed saw a double-digit decline.

According to research by ISG, the total value of contracts signed globally during the quarter was $13.2bn (£10.5bn), a drop of 5% from the same period in 2019.

Traditional outsourcing, in which an organisation hires an outside service provider, was hit hardest, with total spending on these services down 16%. While cloud-based as-a-service contracts increased by 7% during the quarter, this was the lowest rise for a quarter in the past five years, said ISG.

ISG monitors IT and business process services contracts in Europe, the Middle East and Africa (EMEA) that are worth more than £4.2bn.

During the previous quarter, contact value was also down after being hit by the early disruption caused to businesses by the Covid-19 pandemic, with the sudden decline largely caused by spending cuts in industries such as travel, transportation, hospitality, retail and financial services.

The second quarter bore the brunt of the Covid-19 impact with huge falls as traditional outsourcing contracts dried up.

For example, traditional IT outsourcing (ITO) deals in EMEA reduced in value by a massive 21%. Overall, the EMEA IT and business process outsourcing (BPO) market was down 9% in the second quarter compared to the same period last year, when cloud-based deals – which increased 13% – are taken into account. The actual value of contracts in the EMEA signed during the quarter was $4.5bn.

These falls must be considered in the context that, pre-Covid-19, ISG expected increased spending. “We would expected more significant growth so obviously Covid-19 has had a major impact,” said Barry Matthews, partner at ISG, adding that the huge fall in traditional outsourcing was the result of a lack of deals being agreed in the period.

ISG predicts growth next quarter globally compared to this quarter, with a 3% increase the next quarter compared to the second quarter.

“In line with our prediction last quarter, the managed services market was off 16% as enterprises reined in operating expenses in the face of a pandemic-related slowdown in business activity,” said Steve Hall, president at ISG.

“As-a-service spending did a bit better than we expected, bolstered by IaaS [infrastructure-as-a-service] growth as many enterprises accelerated their infrastructure investments to support work-from-home needs. However, the economic shock of the pandemic among small to medium-sized businesses, in particular, resulted in a decline in SaaS [software-as-a-service], although demand for SaaS-based collaboration tools helped moderate the slowdown.”

UK businesses could see another shock to the system, and any post Covid-19 recovery could be stunted, with the detail of what Brexit means constantly metamorphosing and causing uncertainty.